In a fixed order quantity (FOQ) system, which of the following is TRUE when interest rates increase and all other costs remain the same?
A) Cycle inventory decreases
B) Order quantity increases
C) Order costs increase
D) Safety stock quantity increases

Question

Quizplus · Accepted Answer

When interest rates increase, the cost of holding inventory (which includes the cost of capital) also increases. In a fixed order quantity system, to minimize total costs, companies would reduce the order quantity to decrease cycle inventory, thus reducing the holding costs associated with higher interest rates. Choices B, C, and D do not directly relate to the impact of increased interest rates on inventory management in a FOQ system.

In a Fixed Order Quantity (FOQ) System, Which of the Following